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Inequality and computers

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Tim Noah's excellent series on inequality continues today with a piece exploring one of my chief interests: the awkwardly named "skills-biased technological change."

"Skills-biased technological change," which I will not mention again in this post, essentially suggests that technological changes have transformed the economy in a way that created lots of opportunities for high-skills workers and took opportunities away from workers with fewer skills. If that change happened faster than the labor market could adapt, it's a plausible culprit for rising inequality.

As you might expect, the obvious agent here would be the computer: There are lots of jobs for people who can use computers and lots of jobs that were replaced by computers (think bank tellers), and so maybe inequality is just another way of saying that not enough people are on the right side of the computer revolution.

But as Noah says, that story is more intuitive than it is true. For one thing, the rise in inequality begins in the 1970s. The computer revolution does not. It's years after that when personal computers really transform American industry. And then, in the 1990s, the Internet revolution takes off, and inequality actually goes down a bit.

Moreover, we're not the only ones who had a computer revolution. Europe had one, too. But it didn't have anything like our rise in inequality. So there's something going on here that isn't simply explained by computers.

Finally, Noah doesn't make this argument, but the graph from his piece that I've copied atop this post does: A lot of the rise in inequality has been among a small sliver of the population. The top 1 percent, for instance, has gone from capturing about 8 percent of the national income to 18 percent. But there's no obvious skills differential between workers in the top 1 percent and the workers directly beneath them. It's not like hedge fund managers are the only guys able to use Excel.

By Ezra Klein  |  September 9, 2010; 10:50 AM ET
Categories:  Inequality  
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Comments

I'm wondering about the potential connection between this post and the recent post on lost manufacturing jobs. How much does the latter fill in the rest of the story?

Posted by: jduptonma | September 9, 2010 11:29 AM | Report abuse

Well, that European countries didn't experience the same growth in inequality doesn't necessarily let computers off the hook completely. Computers could have created significant pressure towards increasing inequality but the European economies were set up in such a way that that pressure was mitigated to a much greater extent than it was here.

Still, I think it is very unlikely that computers would be the sole, or even the primary, driver of our current degree of inequality.

Oh, and before someone comes here to grouse about liberals wanting everyone to be equal, nobody is arguing that here. The problem being cited is not that there's inequality at all but the degree of inequality and the fact that it seems to be increasing.

Posted by: MosBen | September 9, 2010 11:43 AM | Report abuse

Robert Reich has a recent blog entry talking about the rising wealth of the top 1%

http://robertreich.org/post/1060844316/the-real-lesson-of-labor-day

According to him, in the late 70s the top 1% earned about 9% of total income and today it's closer to 23% of total income.

Reich claims that various technologies (not just computer tech) and other factors relating to productivity have contributed to this widening income gap.

I don't believe Reich believes loss of manufacturing is a major factor (he is pro-free-trade), but you'd have to read more of his blog to be sure I got that right.

One of the interesting things he says is that the top 1% don't invest all of their money in the USA. Instead, they invest it wherever they get the best return. Hence, the trickle down theory has a significant flaw.

Posted by: lauren2010 | September 9, 2010 11:45 AM | Report abuse

I continue to believe that the single biggest reason for the rise of the earnings of the top 1% is the stock market, or more particularly the openning of the stock market to the middle class.

As the baby boomers "grew up" they, unlike their parents, started investing (whether through IRAs, 401ks (eventually) or just non-tax exempt stock purchases). There is much more money, and far more players in the stock market today than there were in previous generations. This resulted in 2 effects:

(1) the huge rise in "compensation" (salary, bonus, and equity) in senior management, particularly of public entities but also some privately held entities. The shareholders wanted "shareholder value" (ie higher stock prices), and would pay anybody anything if they could deliver it. This was very much exacerbated by the entry into the market of those looking to game the system (i.e. making money in the short-term through trades) instead of looking more at long-term investments. The result is a very few people (senior management) making huge sums of money. As a corollary, those people running the money (i.e. hedge fund managers and private equity) started to make enormous money as well.

(2) particularly in the last 2 decades, the IPO market has been completely transformed. This is probably a byproduct of so much money entering the market, and needing someplace to go. The late nineties saw the rise of a generation of newly rich, as entrepreneurs and their investors parlayed revenue bereft dot-coms into millions, if not billions, of dollars. How much of the income growth in the top 1% can be traced just to the dot-com boom of 97-99?

The truly scary part is that there will come a reckoning. The stock market might have embraced the middle class, and experienced a huge influx of money as a result, but as the boomers age, and money leaves the markets, we are almost certain to experience a decades-long downward pressure on stock prices (just to many sellers, and not enough buyers).

This will mean a lot less money for senior management.

Posted by: WEW72 | September 9, 2010 11:46 AM | Report abuse

I have read a number of books by sociologists about the cycle of poverty, or the "surround of forces" that prevent low-income people from reaching the American Dream, whatever that means today. I think there is another surround of forces for the wealthy -- many factors that protect their wealth, including everything from tax policy to social connections to access to Ivy League education. Those forces all reinforce each other, surrounding the wealthy behind a wall of Country Clubs, sweetheart deals, family-funded bailouts, and favorable public policy. I would love to see someone write a book about this surround of forces for the elite.

In short, as with many trends, growing inequality must be caused by many forces -- however much we'd like to blame one policy or politician.

-Shane, Omaha

Posted by: spekny | September 9, 2010 11:46 AM | Report abuse

Computers' connection to the inequality aside, I'm disheartened, yet again, by that 18% in the hands of 1%. And yes, those hedge fund managers did a great job of using Excel to rip off all of us in the gray 82%. btw, I like the instructional design of this graph.

Posted by: ania8 | September 9, 2010 11:49 AM | Report abuse

Mark Warner [as an individual] has sponsored quite a bit of research on this topic. Some of the data regarding technology gathered back in the late 1970's and early 1980's can help explain the situation.

One aspect is the early-adoption factor. As a simplified example, folks who bought Microsoft at 23 cents a share and Cisco at 46 cents a share -- hundreds of splits ago -- are financially well-off today because they recognized the value of technology when others did not. To some degree, the same is true from a non-financial viewpoint: folks who adapted early are better off than those who didn't.

The concept isn't new. At some point, the ball-peen hammer was new technology and the segment of the population that had the gumption to put it to use was better off than the segment that didn't. The inequality of human ability and motivation isn't a problem any government can correct; in fact, attempts to mitigate it seem to cause the lackluster (less "equal"?) segment of the population to grow.

The TED video from lunch yesterday -- where technology is provided without instruction -- is a helpful demonstration: if technology is considered useful, people who are interested will make use of it, even if they aren't given external incentive to do so.

Posted by: rmgregory | September 9, 2010 11:52 AM | Report abuse

I meant to say "...all of us in the gray 99% holding only 82% share."

Posted by: ania8 | September 9, 2010 11:52 AM | Report abuse

Two words: Tax cuts

The Bush tax cuts accelerated all of the inequalities Noah talks about. The shift to stock options, then the dividend tax cut (which effectively lowered taxes on dividends from 39.5% to 15% in two steps) made a big difference, IMHO, because it takes money to make money. Also, the increase in allowable leverage for high-income investors. Hedge fund guys aren't the only ones who know Excel, but they are the ones who have access to 30:1 leverage and make 20% of the profits on which they pay a 15% tax rate. You do the math.

Posted by: Mimikatz | September 9, 2010 12:02 PM | Report abuse

Put together WEW72's comments regarding the reasons for more money in the financial sector with mine on taxes and add a dollop of the tech argument from rmgregory and you pretty well have it.

A group figures out how to make a bunch of money from technology then persuades the gov't to let them keep more of it, allowing them to make even more money and have even more influence. Charles Schwab, the major proponent to Bush of the dividend tax cut is a perfect embodiment of this. The earnings of his company are dropping as retail investors leave the market, but he's got his so who cares.

Posted by: Mimikatz | September 9, 2010 12:11 PM | Report abuse

There's a reason that Europe didn't see the same sort of rise in inequality that America did--it's because they didn't see anything like the rise of Gross Domestic Product that we did.

http://bit.ly/b3WUoZ

America dwarfs Europe in terms of GDP growth, both as a percentage and in real dollars.

The rise in inequality is a function of our historically unprecedented and globally unequalled economic expansion over the past 50 years. When did inequality start to grow exponentially? In the 1970s? That is, about the time our GDP began to grow exponentially?

The huge growth in inequality is simply an artifact of our insanely productive and powerful economy, not a structural flaw.

I understand than such vast inequalities are offensive to the sensibilities of most folks, but one should proceed with caution in both discussing such inequalities as being a bigger problem than they are, or agitating for remedies which end up killing the goose that lays the golden eggs.

The GDP arc also hews fairly closely to the computer revolution, although there was plenty of percentage growth between 1970 and 1980, when the computer revolution was just getting started, and had done little to impact jobs outside of mainframes for giant banks, financial institutions, and research centers.

Posted by: Kevin_Willis | September 9, 2010 12:12 PM | Report abuse

One of my favorite explanations for the increase in inequality is "assortative mating," which refers to the increasing trend of high achievers marrying other high achievers. Coupled with increasing participation of women in the higher income sectors of the labor market over the period in question, it leads to even futher concentration of household income at the high end. The articles on 'power couples' which periodically appear in the Post and other publications point this out at the highest end of the income distribution, but I think it also would have an effect below the top 1%, since household incomes of a quarter million or more would not be rare for dual professional couples in areas such as medicine, law, or business executives.

Posted by: exgovgirl | September 9, 2010 12:15 PM | Report abuse

You don't get rich investing in the stock market, unless you happen to stumble across a long shot like Microsoft in the 1980's. In general, the stock market may make a rich person richer, but it won't make a middle class person rich because the middle class person doesn't have enough to invest in the first place.

Posted by: tl_houston | September 9, 2010 12:16 PM | Report abuse

If you take a look at the GDP chart I bit.ly-ed in the last post, click on Japan, too. There you see fairly solid growth up through 1995. And, naturally, lots of things worked to lead Japan in the past 15 years of stagnation.

However, Japan is an example of another nation where inequality, measured in real wealth or in CEO vs. worker pay, is much lower than America.

Sometimes, we Americans strike me as the Paris Hiltons of the world, complaining to our lower-middle class neighbors that the pet groomer never makes the diamond studded dog collar on our genetically engineered miniature elephant really, you know, *shine*. Sure, we have a world-beating GDP that has improved the economic circumstances for 95% of our population, but the super-rich have gotten, like, way richer than the merely rich, or the upple middle class rich, who have, at best, only stayed about as rich as they were a few years ago. What kind of horrible country do we live in?

:)

Posted by: Kevin_Willis | September 9, 2010 12:17 PM | Report abuse

I don't need no stinking computer to tell me that outrageous executive compensation practices are responsible for greater inequality in this country. The celebrity CEO is about the worst thing ever created. Totally overpaid, entitled and ruining the economy for the rest of us. Too many bums at the top are getting paid too much. That's the problem.

Posted by: Candressuhmoose | September 9, 2010 12:40 PM | Report abuse

The number of people, especially children, in poverty is increasing. The current recession may permanently stunt the earnings of the cohort entering the labor market from 2008 to whenever (if) it ends. Have you travelled Kevin? You don't see poverty in most of Europe like you see here.

The pie has been growing, but the growth has been going almost entirely to the top 1-2%. That's the point.

Posted by: Mimikatz | September 9, 2010 12:42 PM | Report abuse

It looks like a good portion of the damage happened in the late 1980s.

I wonder if the 1986 tax reform act simply brought more of the existing income of the top 1% into the light. I'm not sure what else changed so rapidly that would have effectively increased the share of income going to the top 1% from 9% to 14% in so short a time (I'm just eyeballing the chart - could be slightly off), especially since 1987 had a stock market crash.

Then we had two bubbles, the benefits thereof primarily flow to people who started the game with a lot of wealth. Note that in ~2002 the income distribution wasn't much different than ~1988.

The story isn't the poor getting much poorer - the poor are in a roughly steady state, but the rich are getting richer.

Some jobs just are never going to see inflation adjusted raises.

A guy working at McDonalds in 2010 is probably about as productive as a similar guy in 1970. The same holds with many retail and service jobs. The value of a particular worker to a company hasn't increased much. But computers might have revolutionized the supply chain process in the same sector, which should increase overall productivity and profits. Profits drive stock prices and CEO compensation (after all, the CEO was running the ship when things were going well), and CEO compensation today is more in stock than it was before. It will probably be worse in the future when a computer can do the $8/hr working stiff job, and all of the alternative working stiff jobs are being automated as well. Will be great for profits though.

Also, there is a lot more money flowing to 'winner take all' categories.

LeBron James is significantly better at basketball than the 1,000th best basketball player in the country. In the 1970s, from what I hear, athletes weren't compensated nearly so generously. Tech might be part of that.

While lots of people can use Excel, there are only a few hedge fund managers that can earn enough for their clients to actually make hundreds of millions or billions in a given year. Hedge funds have high water marks, so if you have a bad year where you are down 50%, not only do you have redemptions but you need 100% capital appreciation in future years before you get your 20% off the top.

There are bidding wars to capture the best CEOs for a company, and (partially thanks to regulation), CEOs all know how much their peers are getting, and rather than be shamed by how much they make, there is also an incentive to top the other guy. Given a limited supply of executives perceived as having star power, this could inflate CEO salaries.

In terms of income inequality, I think computers/tech are driving the top 1% (through things like more efficient supply chains to help CEOs generate profit, more exposure making celebrities and athletes worth more), also helping the top 5%-10% see decent income growth, but do little (other than create automation risk) for the bottom ~80%.

Posted by: justin84 | September 9, 2010 12:45 PM | Report abuse

What happened here, that did not happen elsewhere, is Reagan and his policies. If we want to avoid becoming a 3rd world country, where the top controls the wealth, and most live in poverty, we need to reverse the Reagan policies.

Posted by: AMviennaVA | September 9, 2010 1:07 PM | Report abuse

Interviews with CEOs and the wealthy seem to always point out that they are often the least tech savvy people in the company. They make it a point of pride to avoid doing all the dirty work that their serfs in the company must do. In most cases the rich inherit a lot of money and then get richer and stay rich because they can afford to hire money managers who know what they are doing.

Posted by: AuthorEditor | September 9, 2010 1:10 PM | Report abuse

"I wonder if the 1986 tax reform act simply brought more of the existing income of the top 1% into the light." posted by justin84

Yes it did, as was intended. And what revenues are giveth by lowering rates will be taketh away by increasing rates.

Posted by: bgmma50 | September 9, 2010 1:23 PM | Report abuse

@mimikatz: "The number of people, especially children, in poverty is increasing. The current recession may permanently stunt the earnings of the cohort entering the labor market from 2008 to whenever (if) it ends. Have you travelled Kevin? You don't see poverty in most of Europe like you see here."

from Wikipedia: "The poverty level in the United States, with 12.65% (39.1 million people in poverty, of a total of 309 million) is comparable to the one in France, where 14% of the population live with less than 880 euros per month . . . According to Eurostat the percentage of people in Germany living at risk of poverty (relative poverty) in 2004 was 16% (official national rate 13.5% in 2003). In the UK: "7-18% of the population are found to be in poverty at any one time consistently, from 1994-2004.
In 2003 to 2004, 21% of children lived in households below the poverty line. After housing costs are taken into account, this rises to 28%"

There isn't a lot of evidence the Europe, despite having much lower income inequality (and much lower GDP) has any less poverty than the US. I have travelled some, and my experience has been that much of London seemed pretty impoverished to me. At least the parts I went through. I also stayed at a hotel in a Paris ghetto (this was in 1981), and those folks didn't look to be too far above the poverty line. But that experience is entirely anecdotal.

Another thing to note is that poverty rates are better than they were in 1965, and have gone up and down (usually improving under Democratic administrations, as it turns out, if you want to find a causal relationship there).

Neither the number in poverty or the actual poverty rate has any definitive relationship to measurements of income inequality.

Posted by: Kevin_Willis | September 9, 2010 1:54 PM | Report abuse

"A group figures out how to make a bunch of money from technology then persuades the gov't to let them keep more of it, allowing them to make even more money and have even more influence." posted by Mimikatz

The figuring out how to make a bunch of money part was, is, and always will be the reason that the few have more than the many. In some societies, the many have been more successful than in other societies at figuring out how to take away that money from the few, but the many are rarely able to figure out how to make a bunch of money for themselves. Even if they all have computers and all know how to use Excel.

Posted by: bgmma50 | September 9, 2010 1:56 PM | Report abuse

We have structures which create much of the inequality we see. We're so used to them we don't even think to look for them or to question them. Computers play into them a bit, but are relatively trivial.

Look to the writings of Henry George (1839-1897) if you want to know why our wealth is so concentrated. And look online for what Joe Stiglitz had to say a few weeks ago in a talk at the University of Queensland (Australia) about what the FIRE -- finance, insurance and real estate -- sector is doing to the rest of our economy -- US, that is.

"There are a thousand hacking at the branches of evil to one who is striking at the root." Computers are not part of the root.

Having said that, the ability to skim the cream off by rapid-fire financial transactions does not serve the market or society, just the cream-skimmers, and ought to be corrected. But that's still nibbling at the leaves.

Go to the root. Read Henry George, perhaps starting with wealthandwant.

Posted by: LVTfan1 | September 10, 2010 1:17 PM | Report abuse

What Kevin_Wills meant to post:
http://www.google.com/publicdata?ds=wb-wdi&met=ny_gdp_pcap_cd&idim=country:USA&dl=en&hl=en&q=us+gdp+per+capita#met=ny_gdp_pcap_cd&idim=country:USA:FRA:DEU:GBR:ITA:IRL:AUT:NLD:BEL:GRC:ESP:PRT:DNK:SWE

Posted by: grahamkatz | September 10, 2010 6:35 PM | Report abuse

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